Investing Guidelines: Management Tenets 95Berkshire Hathaway’s own annual reports are a good example. They
meet GAAP obligations, but they go much further. Buffett includes the
separate earnings of each of Berkshire’s businesses and any other addi-
tional information that he feels owners would deem valuable when judg-
ing a company’s economic performance. Buffett admires CEOs who are
able to report to their shareholders in the same candid fashion.
He also admires those with the courage to discuss failure openly.
He believes that managers who confess mistakes publicly are more
likely to correct them. According to Buffett, most annual reports are a
sham. Over time, every company makes mistakes, both large and in-
consequential. Too many managers, he believes, report with excess op-
timism instead of honest explanation, serving perhaps their own
interests in the short term but no one’s interests in the long run.
Buffett credits Charlie Munger with helping him understand the
value of studying one’s mistakes instead of concentrating only on suc-
cess. In his annual reports to Berkshire Hathaway shareholders, Buffett
is open about Berkshire’s economic and management performance,
both good and bad. Through the years, he has admitted the diff iculties
that Berkshire encountered in both the textile and insurance businesses
and his own management failures with these businesses.
His self-criticism is blunt, and unstinting. The merger with General
Re reinsurance company in 1998 brought signif icant trouble, a good
deal of which remained undiagnosed for several years, and came to light
only in the wake of the World Trade Center bombing in 2001. At the
time of the merger, Buffett said later, he thought the reinsurance com-
pany operated with the same discipline he demanded of other Berkshire
insurance companies. “I was dead wrong,” he admitted in 2002. “There
was much to do at that company to get it up to snuff.”^12
The General Re problem was not limited to its insurance practices.
The company also had a division that dealt in trading and derivatives, a
business Buffett considered unattractive at the time of the merger (al-
though, as part of the package, unavoidable) and f inancially disastrous
several years later. In 2003, he wrote this straightforward apology to
shareholders: “I’m sure I could have saved you $100 million or so, if I had
acted more promptly to shut down Gen Re Securities. Charlie would
have moved swiftly to close [it] down—no question about that. I, how-
ever, dithered. As a consequence, our shareholders are paying a far higher
price than was necessary to exit this business.”^13